Health Information Management

Examine denials for inappropriate admissions and review coding and billing process

JustCoding News: Inpatient, November 11, 2009

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Editor's note: This is the first article in a two-part series. Part one addresses claim denials for inpatient services that Recovery Audit Contractors (RAC) deem medically unnecessary. Part two will explore DRGs that RACs have focused on as well as red flags that could indicate  potential improper billing for inpatient admissions.

by Elin Baklid-Kunz, MBA, CPC, CCS

During the RAC demonstration program, many hospitals experienced claim denials for inpatient hospital services that RACs deemed medically unnecessary. RACs found that outpatient observation services would have been more appropriate for the patients in most of these cases.

Medicare will deny coverage for inpatient stays when it determines that the provider could have treated the patient in a less intensive setting without threatening the patient’s safety or health, or when it concludes the physician admitted the patient out of convenience.

A physician may refer a patient for observation services when he or she does not meet medical criteria for admission, but requires monitoring by the physician or hospital staff members to determine whether inpatient care is necessary. Medicare considers patients in observation to be outpatients.

Examine denials due to medical necessity

Medical necessity denials have significantly affected hospitals because in most cases, Medicare denies the entire inpatient stay and the hospital receives no reimbursement under Part A, whereas DRG take-backs only reduce, not entirely eliminate, Part A reimbursement.

Medicare Part A does not cover a medically unnecessary inpatient stay, so when claims are denied for this reason, providers can only resubmit the claim as "Part B inpatient,” with payment under the hospital outpatient prospective payment system (OPPS). This covers diagnostic and certain other ancillary services, but not nursing services, nor most supplies or drugs, and the Part B inpatient payment is significantly lower than the Part A DRG payment.

Consider the financial outcomes

When a payer denies an implantable cardioverter defibrillator procedure (DRG 226, cardiac defibrillator implant without cardiac catheterization, with a major complication/comorbidity [MCC]) for medical necessity for an inpatient service, the hospital would lose the DRG payment of $32,839 (i.e., the calendar year [CY] 2008 amount). The facility would only be allowed to rebill for certain ancillary services under Part B.

If the hospital had not admitted this patient and correctly billed the account as outpatient, the reimbursement would have been $24,504 for APC 0108. The APC payment is considerably less than the inpatient payment, but much higher than the few thousand dollars the hospital would be able to rebill under Part B Inpatient, after the payer denies the entire admission.

A more common inpatient denial due to medical necessity is for chest pain, DRG 313 (DRG 143, prior to FY 2007) with payment of approximately $3,000. For many of these cases, observation services would have been more appropriate. Because observation services are outpatient services, when providers bill observation services in conjunction with certain high level visits (e.g., CPT codes 99284 and 99285 for level 4 and 5 emergency department [ED] visits), payment may be made for the entire extended care encounter using one or two composite APCs when certain criteria are met. CY 2009 composite payments for these high level visits were $354 for APC 8002 and $636 for APC 8003. Again, if Medicare denies the inpatient stay for chest pain, the hospital would lose the DRG payment and only be able to rebill for ancillary services under Part B Inpatient.

Refer to CMS FAQ for guidance

CMS addressed rebilling in their response to frequently asked question (FAQ) # 9462, which clarified whether a service that didn't meet Medicare's medical necessity criteria for an inpatient level of service can be re-billed as an outpatient claim. In the FAQ, CMS stated the following:

Providers can re-bill for Inpatient Part B services, also known as ancillary services, but only for the services on the list in the Benefit Policy Manual. That list can be found in chapter 6, section 10.

Rebilling for any service will only be allowed if all claim processing rules and claim timeliness rules are met. There are no exceptions to the rules in the national program. The time limit for re-billing claims is 15–27 months from the date of service. These normal timely filing rules can be found in the Claims Processing Manual,
chapter 1, section 70.

Look at billing for observation services

Because co-payment is based on admission status, it is important for hospital staff members to inform patients of their admission status. Sometimes patients may not be aware that the physician placed them in observation (meaning their co-payment responsibility might differ depending on their status of inpatient versus outpatient) because providers can administer observation services in area of the hospital, including an inpatient area.

Bill outpatient observation services using revenue code 762. Report all the hours for the entire observation period in the unit column on the UB-04 claim form. For the date of service, report the date that observation care begins, even when that period of observation spans more than one calendar day.

Hospital billing staff members should round to the nearest hour. For example, if a nurse’s note states that a patient was placed in observation at 3 p.m. and discharged to home at 10:50 p.m. the same day, the facility should report ‘8’ in the units field for the reported observation HCPCS code.

Understand HCPCS codes and status indicators

Effective January 1, 2008 use the following HCPCS codes to report hospital observation codes:

  • G0378: Hospital observation service, per hour (status indicator: N)
  • G0379: Direct admission of patient for hospital observation (status indicator: Q3)

In the 2010 OPPS final rule, which takes effect January 1, 2010, CMS has changed the code descriptor for G0379 to read, “Direct referral for hospital observation care” to more accurately reflect that the physician in the community has referred the beneficiary to the hospital for observation services as a hospital outpatient. Because the phrase “Admit to inpatient” has contributed to the confusion surrounding observation for hospitals and beneficiaries, the word “admission” should only be used in reference to inpatient hospital care.

Payment status indicators (SI) are assigned to HCPCS codes and APCs, and they play an important role in determining payment for services under the OPPS. They indicate whether a service represented by a HCPCS code is payable under the OPPS or another payment system, and also whether particular OPPS policies apply to the code.

APC status indicator N means there is no separate APC payment; that payment is packaged into payment for other services. For CY 2009, Medicare replaced current status indicator Q with three new separate status indicators:

  • Q1: Assigned to all STVX-packaged codes
  • Q2: Assigned to all T-packaged codes
  • Q3: Assigned to all codes that may be paid through a composite ambulatory payment classification (APC) based on composite-specific criteria or separately through single code APCs when the criteria are not met.

Understand how composite APCs apply

In certain circumstances, when a physician provides observation care as an integral part of a patient’s extended encounter of care, Medicare may pay for the entire extended care encounter through one of two composite APCs—APC 8002 and APC 8003—when you meet certain criteria. Note the following guidance from the Medicare Claims Processing Manual:

  • APC 8002 (Level I extended assessment and management composite) describes an encounter for care provided to a patient that includes a high level (Level 5) clinic visit or direct referral for observation in conjunction with observation services of substantial duration (eight or more hours).
  • APC 8003 (Level II extended assessment and management composite) describes an encounter for care provided to a patient that includes a high level (Level 4 or 5) ED visit or critical care services in conjunction with observation services of substantial duration. Beginning January 1, 2009, APC 8003 also includes high level (Level 5) Type B ED visits.

Prior to January 1, 2008, Medicare paid for observations services only when you reported certain diagnoses, but now there are no restrictions on what diagnosis codes you report for payment of these composite APCs. However, Medicare will not pay for composite APCs when you report observation services in association with a surgical procedure (T-status procedure) or the hours of observation care reported are less than eight.

Facilities may receive payment for direct referral for observation care (HCPCS code G0379) in several ways:

  • Separately as a low-level hospital clinic visit under APC 0604
  • Packaged into payment for composite APC 8002
  • Packaged into the payment for other separately payable services provided in the same encounter.

The criteria for payment of HCPCS code G0379 under either APC 0604 or APC 8002 include:

  • You reported both HCPCS codes G0378 and G0379 for the same date of service.
  • The facility did not provide critical care (APC 0617) or any service with a status indicator of T or V for this patient on the same date of service as HCPCS code G0379.

If you do not meet either of the above criteria, Medicare will assign status indicator N to HCPCS code G0379 and will package the payment into that for other separately payable services provided during the same encounter.

The claim for observation services must include one of the following services in addition to the reported observation services. The additional services listed below must have a line item date of service for the same day or a date before that which you report for observation:

  • ED visit: Level 4 (CPT code 99284) or level 5 (CPT code 99285)
  • Clinic visit: Level 5 (CPT code 99205 or 99215)
  • Critical care (CPT code 99291)
  • Direct admission to observation reported with HCPCS code G0379

Editor’s note: Elin Baklid-Kunz, MBA, CPC, CCS, is the director of physician services for Halifax Health in Daytona Beach, FL. E-mail her at

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